1. Real Estate Finance © JR DeLisle, Ph. D. Lecture 4(b): Fixed Rate Mortgages by James R. DeLisle, Ph.D. January 14, 2010

2. Real Estate Finance © JR DeLisle, Ph. D. Lecture Overview Mortgage Overview –Typology of Mortgages –Mortgage Regulations –Mortgage Mechanics Fixed Rate, Fully-amortizing Mortgage –Overview –Concepts –Excel Set-up

3. Real Estate Finance © JR DeLisle, Ph. D. Periodic Repayment (PR) Future Present PV$ PR1/P Interest Principle What is the Periodic Payment to amortize $1?

4. Real Estate Finance © JR DeLisle, Ph. D. Periodic Repayment (PR): Overview $1,000 $247 $200 ? What is the Periodic Payment/Yr that will amortize $1,000 over 5 yr at 7.5%?

5. Real Estate Finance © JR DeLisle, Ph. D. A Typology of Residential Mortgages

6. Real Estate Finance © JR DeLisle, Ph. D. Traditional Fixed-Rate Mortgage (FRM) Advantages –Constant Payment; low payment, long amortization –No balloon payment if fully amortizing –Easy to administer and budget –Large initial interest tax shields –Trade-off between rates and terms Disadvantages –May not be affordable for 1 st time homebuyers –May not reflect expected income pattern

7. Real Estate Finance © JR DeLisle, Ph. D. Traditional Mortgage Assumptions PP * LV Pi PMT INT PRIN

8. Real Estate Finance © JR DeLisle, Ph. D. Traditional FRM: Example

9. Real Estate Finance © JR DeLisle, Ph. D. Loan Closing Costs Statutory –Transfer –Recording Fees etc. Third Party Charges –Appraisals –Surveys, Inspections, etc. Additional Finance Charges –Loan Origination Fees –Loan Discount Fees – “Points” Used to raise the yield on the loan Borrower trade-off: points vs. contract rate 1 Point = 1% of the loan amount

10. Real Estate Finance © JR DeLisle, Ph. D. Why Points? Rationale –Sticky mortgage rates –Price in the risk of a borrower –Early repayment of a loan does not allow recovery of origination costs –Earn a profit on loans sold to investors at a yield equal to the loan interest rate. Example

11. Real Estate Finance © JR DeLisle, Ph. D. Impact of Points on Full Holding Period

12. Real Estate Finance © JR DeLisle, Ph. D. Impact of Points if 5 year Hold?

13. Real Estate Finance © JR DeLisle, Ph. D. What if add Prepayment Penalty?

14. Real Estate Finance © JR DeLisle, Ph. D. APR “Cost” after fees & points “3%fees & points

15. Real Estate Finance © JR DeLisle, Ph. D. Typology of Residential Mortgages

16. Real Estate Finance © JR DeLisle, Ph. D. Front-end Mortgage Overview: Part 1 FRM CAM BDM PAM

17. Real Estate Finance © JR DeLisle, Ph. D. Front-end Mortgage Overview: Part 2 WRAP PMM

18. Real Estate Finance © JR DeLisle, Ph. D. Operating Period Mortgages

19. Real Estate Finance © JR DeLisle, Ph. D. Operating Period Mortgage Overview GPM ARM RRM (renegotiable rate) BuM

20. Real Estate Finance © JR DeLisle, Ph. D. Back-end Mortgage Overview

21. Real Estate Finance © JR DeLisle, Ph. D. Back-end Mortgage Overview: Part 1 SAM EPM NAM BaM

22. Real Estate Finance © JR DeLisle, Ph. D. Back-end Mortgage Overview: Part 2 RAM RM

23. Real Estate Finance © JR DeLisle, Ph. D. Base Case

24. Real Estate Finance © JR DeLisle, Ph. D. Traditional Mortgage Payment Schedule

25. Real Estate Finance © JR DeLisle, Ph. D. Traditional Mortgage Amortization Patterns

26. Real Estate Finance © JR DeLisle, Ph. D. Traditional Mortgage: Prepayment

27. Real Estate Finance © JR DeLisle, Ph. D. Lecture Summary Mortgage Overview –Typology of Mortgages –Mortgage Regulations –Mortgage Mechanics Fixed Rate, Fully-amortizing Mortgage –Overview –Concepts –Excel Set-up